Are we in a social media bubble?

©IDG Communications, Inc. Photo contributed by Matthew Mikaelian.

eConsultancy, 4/27/11

In the years before the financial crisis, we saw asset values rocketing, a host of new buzzwords appearing and a shared conviction that growth would be eternal. So how is that different from social media right now?

Riding the rocket
A bubble can be defined as ‘trade in high volumes at prices that are considerably at variance with intrinsic asset values’.

Intrinsic value is hard to define, since prices are what people are willing to pay. So bubbles are visible in retrospect: if prices suddenly fall, as house and share prices did in 2007–8, that suggests that a bubble has burst.

We’re certainly seeing rocketing valuations for social media firms, just as shares in building firms and banks soared from 2000 to 2007.

Twitter is valued at $10bn on sales of $100m. Some commentators see Facebook’s astonishing $82.9bn valuation (an eightfold-plus rise from 2009’s $10bn) as a clear sign of a bubble, while Groupon’s rumoured $15–20bn IPO makes Google’s $6bn offer look like peanuts.

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